Italy's troubles weigh on European economy

FRANKFURT, Germany (AP) - Italy is standing out as the European economy's problem child. Again.

Other countries that used to be the bearers of bad news - Spain, Greece, Ireland, Portugal - are slowly healing from the debt crisis that ravaged the currency union for much of the past five years.

Italy, by contrast, slid back into recession in the second quarter. And efforts by Prime Minister Matteo Renzi to shake up the country's bureaucracy-choked economy have slowed, just six months after he promised to strike swiftly.

The troubles in the euro's third-largest economy are weighing on the already weak economic recovery in the 18-country eurozone and complicating life for the European Central Bank.

Figures Thursday are expected to show the eurozone barely grew the second quarter. The expectation in the markets is that it grew by a quarterly rate of 0.1 percent - around 0.4 percent on an annualized basis.

Italy isn't solely responsible. Germany and France, Europe's top two economies, are expected to post flat performances, partly because of the impact of the crisis in Ukraine.

But Italy has been consistently posting poor numbers for years. In the second quarter, Italian output fell 0.2 percent, the 11th drop in the last 12 quarters. Growth has averaged less than a half percent a year for the past decade, compared to 1 ¼ percent across the Group of Seven leading industrialized countries, which also includes the U.S., Japan, Canada, Britain, France and Germany.

Meanwhile things are modestly looking up for those countries that nearly went bankrupt. The rebound is most notable in Spain, which grew 0.6 percent in the second quarter. Greece is also expected to emerge from its six-year recession sometime this year and unemployment is falling in Portugal.

Italy's performance drew a scolding from ECB head Mario Draghi, a former civil servant at the Italian Treasury and Bank of Italy head. Draghi said private businesses were not investing because they did not see the government tackling the country's problems.

"The lack of structural reforms produces a very powerful factor that discourages investment," Draghi said last Thursday after the bank kept its main interest rate at a record low of 0.15 percent.

"There are stories of investors who would like to create, to build plants and equipment and create jobs, but it takes them months to get an authorization to do so," he said. "There are stories of young people who tried to open their business, and it takes eight to nine months before they can do so."

Renzi has conceded that his government needs to do more but defends his decision to first focus on reforming Italy's unwieldy electoral system that has made change difficult.

Now Renzi says he will roll out economic reform - over the next 1,000 days.

"Italy urgently needs reforms, announcements are not enough," Mizuho chief European economist Riccardo Barbieri said as he cut his growth forecast for Italy for this year from zero to minus 0.2 percent. "Italy cannot wait 1,000 days."

What's particularly worrisome about Italy is that the country has a solid industrial sector and many strong companies, from Fiat to Prada. The problems are with government.

Specific structural, or long-term, issues include: High taxes, red tape and bureaucratic delays, corruption, and rigid rules on hiring and firing people. One glaring issue that scares off investors is the inability to enforce a contract in Italy's slow-moving court system. It takes an average of 1,185 days to resolve a contract dispute, twice the average time for other rich countries.

Italy ranks 65th on the World Bank's ease of doing business index, behind Belarus, Botswana and Bulgaria. Its debt level at year end was a high 132.6 percent of annual economic output - second only to Greece in the eurozone - and is expected to rise this year.

Italy is a problem for the ECB as it weighs whether to use large-scale asset purchases to pump new money into the economy and spur growth. The U.S., Britain and Japan have all done that. For the ECB, one argument against asset purchases is that printing money could effectively bail out countries that won't take steps to reform their own economies. As Draghi put it, Italy's lack of investment "has nothing to do with monetary policy."

Draghi's exasperated tone may reflect the ECB's recent experience with his home country.

In August, 2011, it appeared that Italy might default on its mountain of debt, a shock that could have destroyed the euro. The ECB made limited purchases of government debt to try to drive down borrowing costs. But then-Prime Minister Silvio Berlusconi didn't carry through with reforms. He was eventually replaced by temporary technocrat Mario Monti, who put government finances in better shape with tax increases and spending restraint. Default is off the table, for now.